What everyone should know about Individual Retirement Accounts (IRAs) and how to use them in the most tax efficient manner.

IRA Basics

  • Many retirees today have large IRAs due to rolling their assets into one
  • All distributions from an IRA are ordinary income unlike capital assets which are capital gains income
  • Ordinary Income Tax rates can go up to 37% while capital gains rates are taxed at 15% except for the top earners which are taxed at 20%

What is the Most Tax Efficient Way to Distribute Your IRA While Living?

  • Do not take out before age 59½ – 10% penalty
  • If possible wait until age 70½ (age 72 if turned 70½ starting January 1, 2020) – must start required minimum distribution (RMD)
  • If you do not need RMD consider directing distribution to charity as a qualified charitable distribution (QCD)
  • QCDs can limit your tax exposure whether you have limited or high income

How Should You Give Your IRA Away Upon Your Death?

  • Is there a surviving spouse? General rule is to give to spouse (subject to later exceptions.)
  • If no surviving spouse, then it is best to evaluate how heirs should receive IRA
  • Factors to consider:
    • Relationship – child vs. niece or nephew
    • Spendthrift
    • Ability to manage money
    • Marital relationship
    • Current need for funds
    • Whether other sources of income are available
    • Charitable inclined even at little or no cost to heirs
    • Inherited IRA is not creditor protected if no state opt-out
    • All inherited IRAs other than spouse MUST be paid out within 10 years

Some Suggestions

Ways to give to heirs

  • Outright – but remember to use separate account rule for each heir
    • Heir must withdraw all income within 10 years
    • Heir can take entire amount out at any time
  • Through conduit trust
    • Limits access to income in accordance with terms of trust but could result in negative tax consequences
  • Through Charitable Remainder Unitrust (CRUT)

What is CRUT?

Characteristics of a CRUT

  • Tax exempt trust that grows tax-free like an IRA
  • Has two different parts to trust:
    • Income for lifetime to heirs (or up to 20 years)
    • Principal (called Remainder) for charities
  • Unlike ordinary income distributions from IRA, a CRUT over time can distribute lower taxed capital gain distributions to heirs
  • Heirs receive a fixed percentage from CRUT each year (minimum of 5% of value of trust as determined each year) for lifetime or period up to 20 years (you make these determinations)

MV CRUT Advantages

  • MV has retained Mill Creek Capital Advisors to manage and invest all IRA funds received for CRUTS (fees range from 0.50% to 0.65% with manager and trading costs of 0.20% to 0.25%.) These fees are substantially less than other investment managers.
  • MV will serve as Trustee for No Cost for term of each CRUT
  • Donors can choose other charities to benefit from remaining assets when the trust ends

What Can an MV CRUT Do for You & Your Heirs?

  • Avoid spendthrift issues
  • Protect heirs from creditor or marital issues
  • Provide access to professional money manager at a very favorable rate
  • Payments can be made beyond the 10 year limitation of an inherited IRA
  • Provide comfort of knowing MV will be there as trustee to serve your heirs
  • Provide ability to direct tax savings to favorite charity at little cost to heirs
  • Assure you that assets go where directed
  • Usually provides a steady stream of increasing payments each year over the long term

Can I use more than my IRA to fund a CRUT?

  • Yes. For many, IRA is only a small part of their estate.
  • CRUTs for relatives funded with non IRA assets do not have the same income tax efficiencies, but still can lower death taxes and provide the same non tax benefits.

Where do I go from here?

  • Check your beneficiary forms to make sure they are current
  • Complete the attached Information Data Form and return it to Gift the Planning Office to receive your personal CRUT illustration
  • Contact your local gift planner or Attorney Blitz for a free evaluation of your IRA plan

Scenario One

Option 1 – Jack leaves a $1M IRA to Jill (his second wife age 71)

  • Jill gets to roll over the IRA and take RMD for her life or spend it all as she sees fit
  • Jill gets to leave money to new boyfriend, John

Option 2 – Jack leaves a $1M IRA to CRUT for Jill

  • Jill gets payments each year for life at 5% of trust assets
  • MV manages trust and makes payments to Jill
  • Leftover assets upon death of Jill goes to MV and other favorite charities instead of boyfriend

Scenario Two

Option 1 – Jack leaves a $1M IRA equally to son, John (age 60), and daughter, Sue (age 63)

  • IRAs for John and Sue payout annually for 10 years
  • John’s IRA gets attached by Vegas creditors and Sue invests her IRA with snake oil salesman

Option 2 – John and Sue receive equal payment(s) each year from CRUT at between 5% of trust value; then surviving child receives entire payment until his or her death

  • Vegas creditors lose out on attachment to CRUT
  • Snake oil salesman doesn’t get investment
  • MV invests funds wisely for John & Sue’s future so they receive lots of capital gains income over time
  • MV and favorite charities receive remaining assets upon death of surviving child

Scenario Three

Option 1 – Carol leaves her $1M IRA to her 4 nieces and nephews enjoying life in Mexico

  • IRAs pay out to nieces and nephews over 10 years
  • Nieces and nephews decide to live the good life and spend Aunt Carol’s money in the first year

Option 2 – Carol leaves her $1M to a CRUT that pays 5% of trust annually for 10 years and then terminates with remainder to MV and other charities

  • Nieces and nephews think Aunt Carol is a scrooge but learn to live with 10 year payments

Neither Masonic Villages of the Grand Lodge of Pennsylvania nor Alvin H. Blitz, Esq. provide legal, financial, or tax advice. None of the information in The Blitz should be deemed legal, financial, or tax advice or acted upon by any person without prior consultation with appropriate professional advisors.